BUY: Paragon Banking Group (PAG)
A share buyback, increased dividend and higher returns make the buy-to-let lender a standout performer in the banking sector, writes Julian Hofmann.
Paragon Banking Group handed out Christmas goodies in its full-year results with a £50mn share buyback, a 30 per cent dividend increase and a net interest margin of 3.09 per cent that came in well ahead of what anyone had forecast. Investors took the cue to bid up the shares on the day by 8 per cent, which represented their best individual performance for the year. In short, specialist banks — in Paragon’s case with a focus on professional buy-to-let landlords — seem to be far outperforming the large high street players.
Interpreting the reported results was complicated as negative fair value charges related to interest rate expectations cut back reported profits. However, at the operating level, profits increased by 23 per cent to £277mn, driven by a mortgage loan book up 4.4 per cent to £12.6bn. Meanwhile, impairment provisions increased by £4mn to £18mn for the year, while operating expenses were as forecast at £170mn.
Chief executive Nigel Terrington ascribed the growth to Paragon’s focus on professional landlords, “We see professional landlords as more resilient as they operate within corporate structures that allow for the tax deductibility of their borrowing costs. The amateurs who entered the market at a time of low interest rates are struggling with cost increases.” Management also raised the target for next year’s return on tangible equity to 15-20 per cent, from 15 per cent currently, to reflect two years of above-target returns.
Peel Hunt increased its forecasts marginally on the back of the results, with the caveat that predicting net interest margin in a volatile lending market is difficult. The broker reckons the shares, on a forward price/earnings ratio of six, and trading at 16 per cent below net tangible assets, are undervalued. We tend to agree.
BUY: Redde Northgate (REDD)
The group has upgraded its guidance despite persistent supply issues in the UK, writes Jemma Slingo.
Motor insurance services company Redde and fleet hire specialist Northgate merged in 2020 to form Redde Northgate. In some ways, however, the group is still a business of two halves.
In the six months to October 31, the claims and services division increased revenue by 26 per cent to £417mn, while underlying operating profit jumped by 29 per cent to £26.3mn. This was driven by increased volumes from existing customers and new contracts, as well as higher prices. Its operating margin stayed steady at 6.3 per cent.
As in previous years, however, the higher-margin vehicle rental business faced issues. In the UK and Ireland, the average number of vehicles on hire fell by 7 per cent to 45,900 and management noted that vans are still hard to come by.
“Pockets of light commercial vehicle supply have become increasingly available but supply generally remains well below historic levels for right-hand drive vehicles, reflecting the continued limited number of LCV registrations in the UK which are still running at the low point of the past decade,” Redde Northgate concluded.
Second-hand vehicles are still fetching a good price, however, despite “increasing levels of de-fleeting”, and the division managed to grow its underlying operating profit by 4.3 per cent to £49.6mn on the back of strong demand for ancillary services.
The situation in Spain was significantly better. Average vehicles on hire rose by over 4 per cent to 55,500 and rental profits increased by 12 per cent to £28.1mn. Management noted “progressive improvement in the supply of new vehicles” and said its rental margin remained “close to historic highs” at 20 per cent.
Management has now issued a “modest” profit upgrade for the full year, citing a “healthy pipeline” of work.
Redde Northgate’s share price has been on a rollercoaster over the past few years, and there is still a lot of uncertainty over the supply of vehicles and the electric vehicle transition. However, we like the fact that demand is robust, margins are stable and issues seem to be easing. The share are also very cheap, trading on a forward price/earnings multiple of just 6.8.
HOLD: Tui (Tui)
Europe’s biggest tour operator has pivoted to a profit after several difficult years, writes Christopher Akers.
Tui shares climbed by more than 10 per cent after the flight and package holiday company revealed it is considering delisting from the London Stock Exchange to pursue a simplified structure under a single German listing. This wouldn’t be an unreasonable move, given that there has been “a notable liquidity migration from [the] UK to Germany” for trading in the company’s shares, and Tui could benefit from the EU single market rules.
The listing news took the headlines, but the underlying annual performance was solid, with revenue exceeding pre-pandemic levels as the company enjoyed a year free of Covid-19 travel restrictions. Top-line growth was driven by both higher prices and volumes, with customer numbers up 13 per cent to 19mn.
Underlying operating profit doubled to €977mn (£837mn), with management flagging significant growth for cruises and strong performances across other categories such as hotels and resorts in the fourth quarter.
Some tasty forecasts also helped sentiment on results day. For 2024, guidance is for a revenue uplift of at least 10 per cent and underlying cash profit growth of at least a quarter. The winter bookings pipeline is up 11 per cent on last year despite the impact of slowing bookings in Egypt due to the troubles in the Middle East.
Elsewhere, net debt fell by 39 per cent to €2.1bn after a rights issue earlier in the year. The net leverage ratio was down from 2.8 times to 1.2 times year on year to take it under the pre-pandemic position.
The shares trade hands at five times forward consensus earnings, according to FactSet, a nice discount to the five-year average of 13 times.
